Service tax deducted at source did not accrue as income; 234B interest depends on valid advance-tax default.

An amount deducted by customers towards service tax under the reverse charge mechanism was held not to be taxable as royalty income where it never accrued to or was received by the assessee and no enforceable right to recover it remained. The addition was therefore not sustainable, subject to factual verification by the Assessing Officer. Interest under section 234B also required reconsideration because advance tax liability must be computed after giving credit for tax deductible at source under section 209(1)(d); if the income is subject to TDS, default cannot be presumed without a valid finding on the underlying tax computation.

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Issues: (i) Whether the amount deducted by the customers towards service tax under the reverse charge mechanism could be treated as income of the assessee and brought to tax. (ii) Whether interest under section 234B could be levied where the assessee's income was subject to tax deduction at source.

Issue (i): Whether the amount deducted by the customers towards service tax under the reverse charge mechanism could be treated as income of the assessee and brought to tax.

Analysis: The liability to pay service tax under section 66A of the Finance Act, 1994, was cast on the recipient of the services under the reverse charge mechanism. On the facts recorded, the customers deducted the service tax amount from the royalty payable, remitted only the balance, and the assessee had accepted that adjustment and retained no enforceable claim for recovery of the deducted sum. The amount never accrued to the assessee and was never received by it. In those circumstances, the deducted amount did not assume the character of income in the assessee's hands. The authorities below were therefore not justified in including it as taxable royalty income.

Conclusion: The addition on account of service tax deducted by the customers was not sustainable in law and was liable to be deleted, subject to verification of the factual claim by the Assessing Officer.

Issue (ii): Whether interest under section 234B could be levied where the assessee's income was subject to tax deduction at source.

Analysis: For computing advance tax liability, section 209(1)(d) requires the tax deductible at source on income included in the total income to be considered. If income is subject to tax deduction at source, the assessee cannot be treated as in default merely because the payer failed to deduct or short-deducted tax. At the same time, levy of interest under section 234B is mandatory only when the assessee is actually found to be in default in payment of advance tax. Since the substantive issue affecting the tax computation was remitted for verification, the question of interest also required reconsideration in that light.

Conclusion: The levy of interest under section 234B was set aside for fresh examination by the Assessing Officer in accordance with the outcome of the substantive issue.

Final Conclusion: The appeals were allowed only to the extent indicated on the substantive addition and the consequential interest issue, with the matter remitted for limited verification where necessary.

Ratio Decidendi: An amount deducted from contractual receipts and never accrued or became receivable by the assessee cannot be taxed as income, and interest under section 234B can be sustained only after a valid finding of default in advance tax liability computed in accordance with section 209(1)(d).

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